The White Lies About Black Gold

(Part two of a three-part series on energy. Part three will appear Dec. 9)                

“You lie!”                                           
Rep. Joe Wilson during President Barack Obama’s healthcare 2009 speech

It’s one year after Barack Obama’s presidential victory and the winds of winter are beginning to gale. But don’t expect him to give Jimmy Carter-like sweater-clad chats from a chilly Oval Office.

Carter—the first president to warn us about Arab oil dependency three decades ago—is irrelevant to today’s Democrats. Rather than engage the nation about our critical dependence on Middle East oil, Obama and the Democrats have either ignored our energy problems, or worse—outright lied about them.

At the August 2008 Democratic National Convention Obama declared: “I’ll invest 150 billion dollars over the next decade in renewable energy—an investment that will lead to new industries and 5 million new jobs that pay well and can’t ever be outsourced.”

Apparently Obama didn’t feel as “green” after winning the election. Just one day after he reiterated his commitment to renewable fuels in his State of the Union address in January 2009, we were told that the president’s budget cuts would force layoffs at the National Renewable Energy Laboratory.

Then there is Obama’s proclamation made on Oct. 15, 2008, during the presidential debates:

“In 10 years,” said candidate Obama, “we can reduce our dependence so that we no longer have to import oil from the Middle East or Venezuela.”

It’s Called Peak Oil Mr. President
Such comments reveal a president that is either naïve about the energy situation, or is concerned with what is politically expedient. I can’t decide which.

What I do know is that what he says about oil is impossible. And I should know; I have been around petroleum all my life.

My dad was a geologist and oil trader when some of the biggest petro fields in world were struck in the 1950s and 1960s. He became the founder and publisher of OilWeek, a weekly petroleum magazine that counted the Saudi Oil Ministry among its subscribers and which is still published to this day in Calgary, Canada.

I studied geology during the first oil crisis of the 1970s. I graduated from the University of Calgary just as prices were cresting at $36 per barrel—more than 10 times higher than where they had been at the beginning of the decade.

For nearly 30 years I’ve been covering the oil markets and writing about energy. I am certainly not the smartest fellow in and around oil and gas. But I’ve had the good fortune to meet some of the men and women who are.

All would tell you the one truth that I know—that the United States of America is critically dependent on Arab oil.

It is called Peak Oil, and for the U.S. that happened 40 years ago.

Today the U.S. is pumping just 4.9 million barrels of oil per day (mb/d), or just a little more than half of the oil pumped in 1970. In fact the U.S. hasn’t pumped such little oil since the 1940s when Truman was President and our population was half of what it is today.

It is a situation that is going to only get worse as America’s Big Three crude producers—Texas, California and Alaska—are showing major declines.

Nearly half of our domestic crude production comes from these three states. Yet Texas’ oil output has fallen by 57 percent since 1981. California delivers just a little more than half of what it was pumping in 1985 and Alaska, once America’s oil oasis, has had production decline by a whopping two-thirds in the past 20 years.

Why the Bakken Formation is Baloney
One final note about domestic oil production—every time I write about it, I get comments about the Bakken formation.

The Bakken formation is in North Dakota and Montana. A lot of people wanting to sell newsletters and/or penny oil stocks have claimed incredible numbers for the region; some say it holds billions of barrels of oil, others say hundreds of billions of barrels of oil. One promoter even wrote that it had 2 trillion barrels of oil! If true that would mean there is more than twice as much oil below North Dakota rock than what remains in the rest of the world.

The best undertaking of the region was done by the Pittman/Price/LeFever study which estimated the volume of oil at 200 billion to 400 billion barrels. But here is the rub: because of the lower permeability and lower porosity of the formations, only 1 percent of this total is likely to be recovered at an effective cost. In other words we are talking at best 4 billion barrels—about enough oil to keep the U.S. going for five months.

The geology in North Dakota means that the oil is not pooled in elephant fields like Prudhoe Bay in Alaska, Ghawar in Saudi Arabia or Cantarell in Mexico.

Furthermore, meaningful production from the Bakken formation won’t take place for more than a decade. (That’s a similar timeline to bringing new Alaskan oil to market).

According to The Oil Drum, at some point we might have production of 225,000 barrels per day from the Bakken formation, “Which will have only a minor effect on U.S. production or imports.”

To read a detailed geologic analysis of the Bakken formation, go to: http://www.theoildrum.com/node/3868.

Digging Instead of Drilling
So while bragging up the Bakken may sell newsletters, it won’t save America from an impending oil crisis. And make no mistake, one is on the way.

We have some stopgap measures, including opening up new areas as well as horizontal drilling and offshore drilling. But oil magnate T. Boone Pickens estimates that if every possible new technology worked and if drilling restrictions were completely removed, the U.S. would still, “Only squeeze another 2 mb/d in added (annual) production.”

As it stands right now the U.S. is importing more than 13 million barrels of oil every day. That total is going to grow and within the next few years one-third of all our oil may come from the Middle East.

Meanwhile—as we discussed in Clean Energy is Pure Fantasy—alternative energy solutions are decades away from fruition.

However there is a real and reliable energy source just a few hundred miles north of Calgary. It is the oil sands of Alberta and Saskatchewan and it is already a major supplier of crude oil to the U.S.

Over the coming decade its importance will only increase and investors that take a stake in it will continue to earn big profits.

Canada is already the largest supplier of oil to the U.S., exporting 2 mb/d. About 1.3 mb/d come from oil sands. Yet in the next 10 years oil sands production will soar to 3.4 mb/d.

Given the rapid decline of Mexican and Alaskan oil fields over that span, Canada will become America’s energy lynchpin, providing it with 4.2 mb/d, or more oil than what the U.S. will be pumping for itself.
 
Invest in Suncor Energy
I first toured Suncor Energy (NYSE, SU, $36.30) nine years ago and as the editor of Outstanding Investments. I urged my subscribers to buy this stock in April 2001 for $12.69 per share (see Suncor price chart below).

But the story of Suncor dates back further than 2001 and will extend well beyond 2010.

It is Canada’s original oil sands developer, having produced the first barrel of crude oil from the Athabasca oil sands in Alberta in 1967.

Today Suncor is the world’s second largest producer of oil sands crude (after Syncrude Canada Ltd.) and is the only company to currently use both mining and in-situ resource technologies.

A fully integrated company, Suncor upgrades the oil from the oil sands to the level of conventional crude at its upstream facilities and then ships the crude to the company’s refineries east to Ontario and south to Colorado.

In August 2009, Suncor merged with Petro-Canada. The move made it Canada’s largest energy company and the fifth largest North American energy company based on market capitalization (the price of the stock times the number of shares trading, which in Suncor’s case is $57 billion).

Action to Take: Buy Suncor at market. The weakening U.S. dollar and supply constraints on oil will push crude prices higher. Suncor stock will continue to climb alongside rising petroleum prices.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

P.S.—Next time, in the conclusion of this three-part series (which will appear Dec. 9), I will look at one real solution to America’s energy crisis, as well as a down-to-earth stock that will heat up your portfolio.

Clean Energy is Pure Fantasy

(Part one of a three-part series on energy)

Barack Obama must be thrilled with fellow Nobel Prize winner and former Vice President Al Gore and his just-published book, Our Choice, A Plan to Solve the Climate Crisis. In it, Gore sings the liberal refrain that big government can save the world.

Gore, who is making the rounds touting his book this month, argues there are economic as well as political reasons to be green.

"There is a common thread running through the discussion of climate, (national) security, and the economic crisis, and that is our ridiculous dependence on foreign oil and coal," Gore said.

In other words, clean energy will bring us peace, prosperity and respite from that “End of Days” scenario known as global warming.

Gore thinks we can have peace because America will no longer be dependent on Middle East oil. As a result we can pull out of the region lock, stock and no barrel.

That will save hundreds of billions of dollars being spent on Arab oil. Best yet, that money can be invested into clean technologies—a super-grid to capture and transport wind and solar power.

Gore’s vision is for America to become a world leader in clean technology and export it around the world, correcting one last annoyance—our staggering trade deficit.

Gore’s utopia is green. Soon we can sleep easy in our lavish solar homes with our electric cars plugged in.

If it sounds too good to be true there is a reason for that—it is.

Jousting at Windmills
If you have ever been to Palm Springs, Calif., and driven west you can’t help but notice the forest of wind turbines that pockmark the desert landscape.

As we drove along Interstate-10 years ago my wife Angela said, “How come the windmills aren’t turning?”

“No wind,” I said.                       

That sums up the problem with wind power, a system that currently produces about 1 percent of America’s energy needs.

When the wind blows you get electricity but when it doesn’t blow you get nothing. That is because it is impossible with current technology to store alternating current. Direct current wind power can’t be stored in batteries. As a result consumers need redundant power plants.

Then there is a question of cost and space.

Last year in England, former Industry Secretary and current Labour MP John Hutton announced the British government should build a huge array of giant windmills to meet the country’s future energy needs.

The Energy Tribune said Hutton’s plan would literally change the face of Britain. That’s because Hutton wants the government to build 7,000 turbines—or one every half-mile around the entire coast of Britain.

It’s interesting that as much as the greens hate to spoil the environment they embrace wind power. Turbines not only kill tens of thousands of birds but also use up more space per unit of capacity than any other power source. According to the U.S. Department of Energy each wind turbine requires 40 acres.

Physicist Howard Hayden at the University of Connecticut sums up the situation: “Imagine a one-mile swath of wind turbines extending from San Francisco to Los Angeles. That land area would be required to produce as much power around the clock as one large coal, natural gas, or nuclear power station that normally occupies about one square kilometer.”

And wind turbines don‘t come cheap. One commercial 2 megawatt turbine costs about $3 million installed.

According to Senator Lamar Alexander (R-TN), “At a time when America needs large amounts of low-cost reliable power, wind produces puny amounts of high-cost unreliable power. We need lower prices; wind power raises prices.”

The Sun of All Things
My experience with solar power dates back to that time we drove past the motionless windmills. It was the early 1980s and we were buying our first house. The 1970s energy crisis was still lingering and since real estate was cheap in Spokane, Wash., we decided to spend some extra money and buy a brand new solar home.

It was a nice enough berm house if you didn’t mind dirt piled up against the sides and the back of it. As for the solar panels, they collected energy to beat the band in the summer, which was too bad since we didn’t have an air conditioner. As for its use in the winter, we were in the rainy Pacific Northwest so our solar panels were practically useless.

Nearly 30 years later solar power meets about 1 percent of America’s electricity needs. And solar is still an incredibly costly proposition. It costs up to $80,000 to put in solar technology that would meet the electrical demands of a modest home.

Green Econometrics did the math. In a 2007 article they calculated that solar energy is 10 to 20 times more expensive than fossil fuels for power generation (see graph below). You can read the story at: http://greenecon.net/understanding-the-cost-of-solar-energy/energy_economics.html.


Beam Me Up Scotty
To better understand how ridiculous the prospect of solar energy is, consider a press release sent out by Pacific Gas & Electric Corporation (PG&E) (NYSE: PCG) this past spring.

PG&E announced that it had requested approval from the California Public Utilities Commission to enter into a power purchase agreement with Solaren Corp. in Southern California.

Under the plan Solaren would deploy a solar array into space—yes space—to beam an average of 850 gigawatt hours (GWh) for the first year of the term, and 1,700 GWh per year over the remaining term to PG&E customers.

According to Solaren it has even had talks with Lockheed-Martin and Boeing to build the solar plant and the rockets needed to send it into orbit.

All of which prompted Energy & Capital to write: “The press has gushed about the ‘next frontier’ of solar power, which would collect power ‘24 hours a day’ from the far brighter solar radiation available above earth’s atmosphere from a low-orbit. The energy would be transmitted to a receiver based in Fresno, Calif.”

Meanwhile, it was revealed that the Pentagon had done its own study on space-based solar power. Their report said that a $10 billion program could create a measly 10-megawatt pilot satellite.
 
The scale of the PG&E project is out of this world. Their satellite would have to be hundreds of times bigger than the International Space Station, which can barely sustain itself with solar energy.

Just one final detail: nobody—not even a Nobel Prize winner—has yet figured out a technology that will actually transfer the sun’s rays.

The fundamental truth is that we will, for decades longer, continue to rely on fossil fuels.

Next week, in Part Two of this three-part series, I will touch on more earthly problems, including America’s all too real oil crisis and one rock solid industry that will help ease America’s energy pains and earn you gusher-type profits.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

Obama’s Bear Market: How to Survive and Prosper

They say you can just buy just about anything, even love. But the truth is you can only rent a bull market and the lease on this one is about to run out.

After devastating losses that pushed the Dow Jones Industrial Average to 6,440 in early 2009, the Dow broke above 10,000 last month for the first time in 53 weeks. All thanks to President Obama and his bagmen at the Federal Reserve.

You see, President Obama and Federal Reserve Chairman Ben Bernanke have already injected more than $1 trillion in new money.

Part of this has been in the form of bank bailouts. More has been given to Detroit automakers. And finally, Washington has inserted a whopping $850 billion directly into the U.S. banking system. It is this final act that will wreak the greatest havoc on the U.S. stock and bond markets.

When the credit crisis hit last year the Fed began “running the printing presses.” We are talking about the creation of hundreds of billions of dollars, so presses aren’t really running. Instead, the Fed has created all this money with the touch of a key-stroke. Soon this mountain of money will spill over into the economy and the markets.

The graph above shows the Fed’s unprecedented creation of U.S. bank reserves.

In his Nov. 2, column, Robert Murphy of PrisonPlanet.com explained: “The United States has a ‘fractional reserve’ banking system, meaning that if you added up all of the checking account balances for the customers of a given bank, the total amount of deposits would far exceed the amount of cash reserves in the vaults of the bank.”

As a result, said Murphy, all this fresh Fed money will soon be lent out at a multiple. A conservative estimate is five times the amount injected. That means that the $850 billion in new bank reserves will be transformed into more than $4 trillion in new money. That would take M1 money supply from $1.7 trillion to $6 trillion in just the next few years!

To read all of Murphy’s story, click here.

 

Even before the avalanche of new money, M1 has risen 50 percent since January 2001 (see graph M1 Money Supply).

With all this fresh cash on the bank’s books, M1 could easily double to more than $3 trillion in the next two years. That would make M1 money supply almost 10 times higher than it was when Ronald Reagan took office.

We haven’t seen this kind of excess monetary growth since the stagflationary 1970s. It was bad for stocks and bonds then and it will be just as bad for them today.

A Short History of Stagflation
Between 1970 and 1981, M2 money supply tripled. A record amount of liquidity was being injected into the economy by the Fed. But all this money wasn’t helping an economy that was just limping along.

From the beginning of 1971 to the end of 1979 the gross domestic product (GDP) rose by just one-third—from $3.9 trillion to $5.2 trillion (in constant dollars).

As the amount of money in the economy vastly exceeded the goods and services being produced, inflation was inevitable.

The consumer price index for the 1970s rose by a staggering 6.5 percent each year. By 1980 a 1970-dollar that had been stuffed in the mattress would buy you just 52 cents worth of goods and services. It marked the end of dollar stability and the post-war economic boom that fueled a bull market in stocks.

In January 1950, the Dow Jones Industrial Average was under 200. In January 1966, it breached 1,000 for the first time. Over the next few years, the Dow moved sideways, twice testing, but never again breaking above the magic 1,000 point level.

Stocks fell into a funk. Money supplied by the Fed was not producing real gains and the stock market reflected this.

In April 1980, the Dow was trading at 759. That might not seem too bad compared to its 1966 apex, but factor in inflation and the 1980 Dow, measured in 1966 terms, was really trading at $329. In real terms the Dow had lost two-thirds of its value in 14 years.

Bond investors also did poorly. In the late 1970s prices on 30-year Treasury bonds fell more than 25 percent as the yields-to-maturity on the bellwether 30-year Treasury bond climbed from a rate of 7.75 percent in 1977 to 14.7 percent in 1981.

The end result was a massive renunciation of paper as investors began switching out of dollars and buying real assets.

Yet while many Americans lost their savings in Big Board stocks and bonds, some investors made incredible gains in precious metals.

Pitfalls and Profits
I first began investing in gold when I was just a teenager and it was selling for $35 per ounce. I kept that gold until it topped out at $840 and corrected back to the $650 per ounce range. So even though I didn’t get out at the top, I did get an 18-fold profit.

If that sounds like ancient history and something that can’t be repeated, don’t be so sure. Nine years ago last month I started writing Outstanding Investments. I told subscribers then to buy gold, silver and platinum as well as precious metal equities. At the time gold was selling for less than $280 per ounce.

Today bullion is trading back over $1,050 per ounce and I have been bullish on the precious metals throughout the decade. I still believe that bullion prices could very well double in the next two to three years. Given the excess of Obamabucks, I can see gold trading for more than $2,000 per ounce by the end of 2012.

And don’t be surprised to see silver rising to $80 per ounce (versus $17 today) and platinum to more than $3,000 per ounce.

Action to Take

It is imperative that you get out of Big Board stocks and all long-term debt instruments including Treasury notes and bonds. Look for a major correction to come in the Dow, the S&P and the NASDAQ in early 2010. I wouldn’t be surprised to see the markets hit new lows. At the same time, bonds are just as susceptible to huge losses as I expect interest rates to go up. I urge you put your money into cash in the form of three-month T-bills.

A T-bill is simply a short-term debt obligation backed by the full faith and credit of the U.S. government. The key to a bill is that it’s very short-term (and pays an incredibly small interest return). It has a maturity of less than one year and is sold in denominations of $1,000. You can buy maturities of one month, three months or six months. I like the three-months T-bills because you are not locked in very long but you don’t have to constantly roll them over.

Three Ways to Buy T-Bills

  1. Go to your local bank and ask to buy Treasury bills. This may be the easiest option because you already make periodic trips to your bank.
  2. Call your investment broker. Tell him or her that you want to purchase three-month T-bills and roll them overuntil further instructions.
  3. Buy Treasury bills directly from Uncle Sam. The Treasury Direct Website will guide you through this process and give you lots of information as well. You can access that site at: www.treasurydirect.gov.

I also urge you to buy some physical gold. If you are just starting out, I suggest you buy 1-ounce U.S. American Eagle coins as well as 1-ounce Canadian Maple Leaf and South African Krugerrand coins.

—John Myers
Myers’ Energy and Gold Report

PS—Next week I will be writing the first of a two-part series on energy. If you think wind power is the answer to tomorrow’s problems you will want to read Part I. It will include why fanciful presumptions by the Obama administration are, at best, ignorance, and at worst, the purposeful deceit of the American public. In Part II, I will tell you the core truth about America’s dwindling petroleum reserves and I will give you a new energy stock pick that should be in your portfolio.

Let’s Nuke the Environmentalists

Greenpeace is running rampant across Alberta’s oil sands. In the past few weeks, 37 activists have been arrested in a spate of incidents targeting North America’s most important energy resource.

The most recent occurred on Oct. 5 when 19 activists stormed an upgrader in Fort Saskatchewan, Alberta. They tied themselves to equipment which is used to transform heavy oil into gasoline.

The protesters unfurled banners reading “Climate Crime” and “Climate SOS” to draw attention to an industry they say is killing the planet.

In September, two-dozen Greenpeace commandoes kayaked down the Athabasca River to intercept a Suncor bridge where conveyor belts move bitumen into an oil sands upgrader.

But my favorite is the protestors that drove a convoy of pickup trucks into the heart of Shell Oil’s massive open pit mine, halting production.

They came from Edmonton to Fort McMurray, Alberta, a 360-mile round trip. The irony of burning all that gasoline to shut down a facility that helps to provide affordable gasoline was apparently lost on them.

Greenpeace says that it is putting a spotlight on the “climate crimes of the tar sands.”

Meanwhile, trouble is also brewing west of the oil sands in the Peace River region, an area that encompasses the Alberta and British Columbia border. It is here that an eco-terrorist is on the loose. His target is EnCana Corp (NYSE: ECA), which is working the vast unconventional pools of sour gas that lay a mile beneath the countryside.

In the past year he has blown up six sour gas pipelines. EnCana is a preeminent natural gas company in North America. Yet the company is so afraid that the bomber is going to kill himself or somebody else they have posted an Osama bin Laden-like bounty of $1 million for information leading to a conviction. The newspapers are calling it the largest reward in Canadian history.

In a letter to the Dawson Creek Daily News the bomber wrote: “Return the land to what it was before you came every last bit of it… before things get a lot worse for you and your terrorist pals in the oil and gas business.”

The badly handwritten letter sent July 15 insists EnCana cease operations in the area. The bomber also promised to suspend attacks during a three-month grace period so “we can all take a summer vacation.”

All considered the oil patch is lucky to have a lazy terrorist on its hands.

From Elephant Fields to Real Elephants

I can already picture the hate mail, “Myers, not everyone concerned about the environment is a protestor or a bomber!”

True, but a lot of Greens just don’t get it. Let me give you an example.

In the early 90s I went to South Africa to report on the gold mines. There, my Uncle Richard and I joined a tour group. Our guide was an English conservationist.

He told our table how the South African government sold elephant hunting licenses for $20,000 a pop. Traveling with game wardens, hunters gladly paid this fee to stalk single bull elephants.

This, said our tour guide, allowed the South African government to cull the herds, thus preventing mass starvation of the animals. All of the funds were put back into the game parks allowing for their future expansion and the eventual growth of the elephant population.

For one woman in our group, this was too much. Right there in a Johannesburg restaurant she came unhinged. “You sell elephant lives for money!”

Sometimes I can’t help myself and this was one of those times.

I turned to my uncle and said, “What do you think Richard?”

I then explained that in 1957 my father Vern and my Uncle Richard had gone on safari and had in fact bagged an elephant.

I went on to defend Richard with the truth—saying that, in fact, elephants have always been endangered by poachers, not hunters; that licensed hunting had in fact created a windfall for conservation throughout southern Africa.

But there was no convincing the lady from Toronto. Once she knew that Richard had killed an elephant he might as well have murdered a baby. She told him that in her book, killing an elephant was worse than killing a person.

I knew then and there that some environmentalists were downright crazy.

Any lingering doubts were erased by a 1990s PBS program called, Can the Elephants be Saved? It should have been titled, Are the Environmentalists Crazy?

The program NOVA focused on Zimbabwe’s wildlife management, one of the most effective on the continent. In the decades leading up to the 1990s the nation’s elephant herd had doubled to more than 60,000 animals, twice what the Parks Department considered the optimum size for the country. Where there were just 3,000 elephants in the Hwange National Park in 1930, there were more than 20,000 by 1990.

To prevent the Park’s destruction and the mass starvation of thousands of elephants, Zimbabwe game officials would accompany high stake hunters who culled a limited number of elephants with high caliber rifles at short distances. For the Park Service it was a matter of the greater good since elephants could not be moved safely to other game parks.

Every elephant culled was immediately skinned and butchered. A full grown elephant can provide 2,000 pounds of prime meat. Dried, this lifesaving resource remains edible for up to one year and helps sustain some poor black tribes on the fringes of the game parks.

This utilization of elephants not only preserved the park but also the long-term existence of elephants and other game. It also contributed millions of dollars to the Zimbabwe economy—money that was used to expand the national parks, build needed infrastructure and improve the standard of living for the Zimbabwe people.

All for the good, correct? Not according to Cynthia Moss, then and still the head of the Amboseli Elephant Research Project in Kenya.

Moss told NOVA that shooting just one elephant, for whatever reason, is fundamentally wrong.

“I don’t call that conservation. I would rather see no elephants than elephants being culled, and that’s an extreme position I’ve come to hold, just because I think it is morally unjustified to kill elephants,” Moss said.

If that’s not an ideologue what is? I can picture Hitler slamming his fist upon a desk and declaring: “If Germany can’t win the war, it doesn’t deserve to survive!”

In case you think Moss’ outlook has evolved, guess again. In fact you can visit her Website at: http://www.elephant.se/cynthia_moss.php. There, she is asked who had the biggest influence on her life. Her answer: Echo.

If you want to know who Echo is you can see her picture at: http://www.elephant.se/database2.php?elephant_id=51.

The Hard Truth about Crude Oil

Greenpeace demonstrates that when it comes to the environment, it’s not just individuals that are off kilter.

Then there is the Environmental Defense Fund (EDF). Earlier this year the EDF proclaimed: “For about a dime a day (per person), we can solve climate change, invest in a clean energy future, and save billions in imported oil.”

Newsweek, no friend to conservatives, had this response in its April 27, 2009, issue: “(If what the EDF says) sounds too good to be true, it’s because it is.”

Newsweek points out that four-fifths of the world’s and America’s energy comes from fossil fuels—oil, coal, natural gas—which are also the largest source of man-made carbon dioxide (CO2), the main greenhouse gas.

This is a fundamental fact that isn’t going to change for generations, regardless of how many people chain themselves to oil sands sites or blow up pipelines.

Moreover, Alberta’s oil sands will remain the key to meeting America’s growing thirst for oil. Canada already supplies the U.S. with 22 percent of its petroleum, the bulk of which comes from Alberta’s oil sands. That share will climb significantly over the next 20 years as oil sands operations expand, Greenpeace be damned.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

Unholy Alliance: How China and Iran Threaten Peace and Prosperity—Plus: Your Lucky Charm When it Comes to New Wealth

“The nuclear playing card… would allow Iran to fill a power vacuum in the region and fuel the fires of Islamist movements presently gaining steam in the Arab world.”
The Jerusalem Post Op Ed Page, September 29, 2009.

Oct. 1 marked the 60th anniversary of communist rule in mainland China.

Just four days before the Red Anniversary, China National Petroleum Corp. signed a contract with National Iranian Oil Co. to develop Iran’s massive South Azadegan oilfield.

Azadegan is the world’s largest oilfield discovered in the past 30 years. It has reserves of 42 billion barrels of oil—double the combined oil reserves in all of the United States.

China now owns 70 percent of this elephant oilfield. All that oil in the heart of Iran will go a long way to satisfying China’s unquenchable thirst for petroleum.

Already Iran provides 14 percent of China’s oil demand, but that total will rise sharply as this unholy alliance strengthens.

“China is looking for a landline connection to the Persian Gulf or endeavoring to create a ‘string of pearls’ chain of naval facilities between itself and the Strait of Hormuz,” warns Thomas P. M. Barnett in his just published book, Great Powers, America and the World After Bush.

By 2030 China will be buying 6 million barrels of oil per day from the Persian Gulf. That is twice what the United States is expected to import from the region. A vast amount of China’s Middle Eastern oil will come from Iran.

It is worth noting that just days before the Iran oil buyout, China announced that it will not support increased sanctions on Iran as a way to curb its nuclear program. Surprise, surprise.

In fact the Obama administration has been left begging for Beijing’s diplomatic support on Iran’s nuclear ambitions. Without it, the United States faces the unpleasant task of fighting another Middle East war. But Iran won’t be the push-over that Iraq was.

“Armed with a vast array of anti-ship and long-range missiles, Iran can target U.S. troop positions throughout the Middle East and strike U.S. Navy ships,” wrote Jephraim P. Gundzik in a 2005 Asia Times article.

“Iran can also use its weapons to blockade the Straits of Hormuz through which one-third of the world’s traded oil is shipped. With the help of Beijing and Moscow, Tehran is becoming an increasingly unappealing military target for the U.S.,” concluded Gundzik.

Unappealing? Yes. Unavoidable? Probably not.

Even the Obama administration understands nuke-toting mullahs in Iran will jeopardize peace in the Middle East and America’s economic security.

Saddam All Over Again

Two years ago Cynthia Tucker wrote in The Atlanta Journal-Constitution: “Should (or would) the United States invade a foreign country for its oil?”

“Of course we would,” wrote Tucker. “We’ve already supported coups, sent armies and invaded at least one country to protect our access to petroleum.”

Make that two if you count Kuwait.

Tucker points to former Federal Reserve Chairman Alan Greenspan’s memoirs.

“I’m saddened that it is politically inconvenient to acknowledge what everyone knows—the Iraq war is largely about oil,” wrote Greenspan.

Greenspan, the mother of all doves, even advised the Bush administration to invade Iraq.

"My view is that Saddam, looking over his 30-year history, very clearly was giving evidence of moving toward controlling the Straits of Hormuz, where there are 17, 18, 19 million barrels a day moving through,” Greenspan said.

That invasion was based on unjustified fears that Iraq had weapons of mass destruction. Seven years later it is almost universally understood that Iran is a short time away from building a nuclear warhead, with a ballistic missile system already on the launch pad.

All the while America faces a growing energy crisis. The U.S. is currently pumping less than 5 million barrels of oil per day. The last time the nation pumped such a frugal amount of crude was when Truman was President. Yet the situation is only going to get worse.

In just a decade the U.S. will be importing more than 90 percent of the oil it burns.

A lot of that oil will come from the Middle East; but only if the region is stable and at peace. This is becoming less likely as the revolutionaries in Iran continue to make their nuclear grab. A development which doesn’t seem to cause the least bit of concern to the world’s other superpower, China.

This is because China’s Cadillac economy is backed up by Pinto-like resources. That means that the nation that was enslaved by Mao Zedong will do whatever is necessary to provide oil to its masses, even if it means war.

The lessons of history are not lost on the Chinese. Poor planning by Mao resulted in The Great Chinese Famine. The result of that was 60 million dead Chinese. It’s a mistake the Chinese won’t make again, even if they have to counter the U.S. in a war.

Crude Profits for the Taking

The clock is ticking down on Iran. With China throwing its money and weight behind Tehran, it is certain they won’t bend to the United Nations (UN).

This sets the stage for a preemptive military attack on Iran by the U.S.

Meanwhile Israel remains a wildcard.

Military action by either the U.S. or Israel would quickly push crude oil past $100 per barrel and perhaps as high as $150 per barrel. This would be incredibly damaging to bonds and Big Board stocks.

This Talisman Offers Real Protection

Yet there are steps you can take to protect yourself financially.

One of my favorite petroleum stocks is Talisman Energy Inc. (NYSE:TLM).
 
Talisman passes the Goldilocks test, not too big and not too small. Its market cap of $17.5 billion is a far cry from Exxon Mobil and its $332 billion market cap. But Talisman is big enough to offer plenty of liquidity and it attracts institutional investors. And unlike Exxon Mobil and their multi-national brethren, Talisman is not burdened with downstream oil operations.

Talisman, headquartered just a couple of miles from my office in Calgary, Alberta, offers a ton of leverage to rising oil prices.

Finally Talisman’s properties are far removed from Koran-carrying maniacs. The company drills for and pumps crude oil and natural gas primarily in North America, with some operations in the United Kingdom, Scandinavia and Southeast Asia.

Action to take: Call your stock broker and buy shares in Talisman Energy (NYSE, TLM) at market.

Yours for real wealth and good health,

—John Myers
Myers’ Energy and Gold Report

The Judicial Decline of America and How to Profit from it

“The Boomer generation represents one of the weakest cohorts of politicians America has ever produced.”–Thomas P.M. Barnett, Great Powers, America and the World After Bush.

Mismanagement in Washington is punishing the dollar. Continued incompetence puts all dollar-backed assets at risk.

Meanwhile, gold prices are once again back over $1,000 per ounce. Yet for gold to reach its inflation adjusted 1980 price it would have to trade at $2,500 per ounce. Impossible you say? Not given the current crisis in leadership.

On Sept. 8, at Wakefield High School in Virginia, President Obama gave a speech to students across the country about the importance of their education, and their responsibility as American students to work hard.

Certainly hard work is needed. Two weeks before Obama spoke it was announced that high school students’ performance on last year’s Scholastic Aptitude Test (SAT) college-entrance exam fell yet again.

Average scores for the class of 2009 in reading dropped to 501 from 502, in writing to 493 from 494, while math managed to hold steady at 515. The combined scores are the lowest this decade. Furthermore, these SAT scores follow more than 25 years of trying to improve U.S. education.

"This is a nearly unrelenting tale of woe and disappointment," said Chester E. Finn Jr., president of the Thomas B. Fordham Institute, a Washington, D.C., think tank. "If there’s any good news here, I can’t find it."

In fact the news is dismal. SAT scores have been in an overall decline for almost 40 years. Meanwhile a new wave of nations are producing another generation of smart kids with a global economy itching to buy up their services.

Hopefully the President has not inspired another generation of wanna-be lawyers. America has more than enough of them. In 2007 the American Bar Association (ABA) counted 1,143,358 in all. That is one lawyer for every 265 people, twice the ratio that Germany has and five times as many as France.

It is interesting to note that last year plans for a new generation of nuclear power stations was put on hold by its own inspectors because of a shortage of skilled engineers.

That’s bad news for the lawyers because no new nuclear plants mean no new litigation against nuclear plant designers and owners. Not that there isn’t plenty of work to keep lawyers busy.

The U.S. tort system cost more than $250 billion in 2007. That is up from less than $43 billion in 1980.

In total, tort costs translate to about $850 per man, woman and child. And get this, since 1950 growth in tort costs has exceeded gross domestic product (GDP) growth by an average of 2 percentage points. Even during recessions, Americans spend more in legal costs. It’s too bad you can’t buy shares in the ABA.

This is not to suggest that we are not heavily vested in lawyers. Some of the very “best” of them are running our nation. Today 46 percent of our government branches are in the hands of lawyers. That includes, of course, the President and the First Lady.

A founder of the Constitution, James Madison, understood that the checking of each branch by the other made for a less effective government. Madison wrote that the sacrifice was worth it to prevent tyranny by a government “in the same hands.”

“No political truth is certainly of greater intrinsic value or is stamped with the authority of more enlightened patrons of liberty than that . . . the accumulation of all powers legislative, executive and judiciary in the same hands, whether of one, a few or many, and whether hereditary, self appointed, or elective, may justly be pronounced the very definition of tyranny.” (Federalist No. 47)*

Whether the federal government is tyrannical can be debated, but you don’t need an MBA to see that it is damned inefficient. Last month the Obama Administration announced its estimate for the budget deficit at $1.58 trillion. That is a trillion dollars larger than last year’s deficit and represents the largest percentage share of GDP in more than 60 years.

Why would we expect anything less? If you have ever been on the “clock” with a lawyer you probably realize how much it costs and how little actually gets accomplished.

Now before I get a rash of comments from lawyers, let me say that I am not alone in my criticism. Way back in the February 1987 Ruff Times, Robert Ringer wrote: “I abhor overgeneralizations. Fairness compels me to point out that only 97 percent of the attorneys in the U.S. are lazy, incompetent, negligent and greedy—yet they give the entire profession a bad name.”

The truth is our government is rife with lawyers and they have been doing a rotten job. An even more alarming truth is that they hold our future and our finances in their hands.

Federal Reserve Chairman Ben Bernanke mans the printing press. Despite the recession, new money is pouring into the economy. Since 2000, M2 money supply has more than doubled, rising from $4 trillion to $9.5 trillion.

One of Bernanke’s first speeches was entitled “Deflation: Making Sure It Doesn’t Happen Here.” On that front he is doing one heck of a job.

What people need to fear from the firm of Barack & Bernanke is the unprecedented amount of new money coming on-stream. The creation of all this cash out of thin air will inevitably be inflationary. That impacts the purchasing power of every dollar instrument you own.

You can protect yourself from dollar inflation by owning gold. I recommend you put at least 10 percent of your investment assets in physical gold. I like 1-ounce U.S. American Eagle coins as well as 1-ounce Canadian Maple Leaf and South African Krugerrand coins.

Call your local coin dealer or if you need one, call Asset Strategies International in Rockville, Md., 800-831-0007 or 301-881-8600 or go to www.assetstrategies.com

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

PS. I will agree with the President that our kids have to get serious about their education. Perhaps they should read Shakespeare. In King Henry VI he wrote: “The first thing we do, let’s kill all the lawyers."

*Footnote: Federalist No. 47 is the 47th paper from the Federalist Papers. Written by Madison, it was published in 1788 under the pseudonym Publius.

Lacking the Resources: The Drain in Real Assets & How to Profit From it

“The Golden Age of American capitalism is over… In the space of half a century it passed from gold, to silver, to paper, and now it is somewhere between plastic and naval lint.” Bill Bonner and Addison Wiggin, The New Empire of Debt.

“The only thing the States is pumping these days is money.” A Calgary-based, multi-national oil executive.

I use to love to ski. But one March morning a couple of years ago it left me feeling pensive and depressed. I stood at the top of Silver Mountain Ski Resort, east of Coeur d’Alene, Idaho, and watched the lower clouds disperse.

I saw how Interstate 90 snaked through Idaho’s once-famous Silver Valley. But that day the only silver I would see was the giant reflective sign that stood over my shoulder.

Fresh snow had only dusted the mountain. Down below the Silver Valley was black and barren, closer to what you would see on the moon than to what you would experience in the Alps.

My research as a metals analyst reminded me that Silver Valley was the only place on earth where more than a billion ounces of silver have been mined. Since 1884 some 1.2 billion ounces of silver have been harvested in Shoshone County.

I left for home in the afternoon and looked at road signs. The towns along the valley proclaim you can revisit the past and see how it was in the days of the silver barons. But with the sun setting the surroundings looked more like they were from the days of the Jurassic than from the days of Hunt and Getty.

The landscape has been dug, drilled, mauled and mined, and whatever silver was in the region has been long since spent. In a way the Silver Valley is a microcosm for America’s over-harvest of its once-bountiful natural resources.

Fifty years ago the United States was the largest producer of oil and a net exporter. Today its number one import is crude oil. Each year the United States spends nearly $300 billion on foreign petroleum. But oil is not the only resource in shortage.

In 2007 five of the 10 fastest growing imports were: nickel (up 47 percent), feedstuff and food-grains (up 34 percent), precious metals (up 34 percent), tin (up 27 percent) and food oils and oilseeds (up 26 percent).

This year the United States will run a trade deficit of about $350 billion. More than 80 percent of that deficit will be for the purchase or raw materials.

Meanwhile America’s insatiable thirst for natural resources has some Canadians nervous.

“Could the U.S. takeover Canada?” asks the Aug. 20, 2009, Vancouver Sun. Perhaps not anytime soon the newspaper says, but there are reasons to be concerned.

The Sun concludes that Canadian politicians will become more protective of this nation’s sovereignty, “if Americans relentlessly continue their unsustainable consumption patterns even as U.S. resources keep on depleting.”

Given the 100-year trend, it is hard to imagine anything else.

America has always been relentless in its consumption of raw materials and it’s hard to see how that will change. The nation’s whole way of life is based on the excessive consumption of oil, land and minerals. It was the harvesting of those resources that made America great and at the same time addicted the country to a resource-intense lifestyle. But now the nation’s resources are running low.

For example, U.S. experienced peak oil production way back in 1970. Since then domestic oil production has been in a steep decline.

Today Canada funnels more than half the 3.4 million barrels of oil it produces daily to the U.S. and provides 82 percent of all U.S. natural gas imports.

Canada also sells a third of its hydroelectricity to U.S. markets and supplies a third of the uranium used in U.S. nuclear power plants.

Water, of course, is another resource soon to be in shortage. Earlier this year, the U.S. Government Accountability Office said at least 36 states are anticipating water shortages within five years. Again, Canada has excess water it can sell to the U.S. (not because Canadians have been better stewards of the land but because Canada has a richer inheritance and one-tenth the population.)

But even Canada does not have the wherewithal to meet all of America’s resource needs, never mind the needs of a thirsting world.

“In the 1960s most countries lived within their ecological resources,” writes guardian.co.uk. “But the latest figures show that today three-quarters of the world’s population live in countries which consume more than they can replenish.”

While Western economies have slowed to a crawl, China’s economy will grow by more than 8 percent this year. Each new day brings tons of new consumption of raw materials—everything from alfalfa to zinc. And as 1.3 billion Chinese continue to satisfy their growing Western tastes for everything from cars to washing machines, the finite supply of natural resources will get smaller and smaller.

According to guardian.co.uk, “The natural resource crisis is proving worse than the global financial crisis. We are using up the earth’s resources very fast; and as a result, we are heading for an ‘ecological credit crunch.'”

That is certainly an exaggeration from the Liberal left. But there is no denying that real assets are getting used up and at a record rate. If you don’t believe me, just look at some commodity price charts. Rising prices reflect growing scarcity or fears of scarcity.

Commodity markets are one of the only true free markets left, and if you ignore them it is at your own peril. Right now the CRB Index tells me that the commodity bull, while wounded in 2008, is very much alive and getting stronger. That means even higher prices for real assets across the board.

Action to take: A conservative but profitable way to play the commodity bull market is with a real asset fund. There are plenty of good real asset funds out there so talk to your stock broker. Just remember, when you invest in a real asset fund you are betting the price of commodities is going to go up. Given the recent weakness in the U.S. dollar and the continued global demand for commodities, I think this is a safe bet.

Yours for real wealth,

John Myers
Myers’ Energy and Gold Report

Living & Damn near Dying with Socialized Medicine

“The reality is that from Canada to Cuba socialized health care’s record is appalling. It’s impossible to tally how many patients die…” Smart Money, July 16, 2007

You can ask me about universal health care. I’ve lived it. I’ve almost died it.

I’m a dual citizen and spent almost equal portions of my adult life in Canada and the United States. Canada has many things going for it and I moved back to Calgary to be where the action is in energy. But it’s a move that almost cost me my life.

I started getting flu-like symptoms on a Sunday last October. I was sluggish and pensive. I had reason to be. I have acute asthma.

As afternoon turned to evening I was having trouble catching my breath. By 7 p.m. I was struggling for air. My wife Angie ordered me to the car and raced me to one of Calgary’s emergency health clinics just down the road. We both knew I might be getting pneumonia, a potential killer for an asthmatic.

It had happened to me once before in Spokane, Wash., and Angie sped me to The Sacred Heart Medical Center. No sooner had I hit the door when two doctors threw me onto a crash cart and a team of five worked to restore my airways. I was then admitted to the hospital for five days. That was in 1992.

Seventeen years later and 500 miles to the north I knew that my chances of surviving weren’t so good.

The clinic I stumbled into last fall was brimming with three dozen patients; many waiting hours to see one doctor who had been at work since 8 that morning. Angie helped me walk to the reception desk and declared to a young woman that I was having trouble breathing.

“Take a number and I will call you when it is your turn,” she said in a cold voice.

Angie protested and said something about my condition being critical.

“Everybody here thinks their condition is critical,” said the girl.

Angie knew that I couldn’t sit and still breathe, so she propped me against a wall and strode into the examining area. Inside there were an assortment of people, some simply needing to get a refill on their prescription, others included junkies just wanting a fix. She had to physically force herself in front of someone entering one of the tiny examining rooms. The Russian doctor listened and helped her walk me to the examining table.

He laid me down and began to administer oxygen before he undertook a frantic search for Ventolin, an emergency drug for asthmatics that was apparently in short supply.

By now I was gasping for air. My bronchi were almost completely swollen shut. I felt myself losing consciousness.

Some time later my eyes opened and I managed a satisfactory breath after the over-wrought doctor slammed adrenaline into my vein. Two hours later, when he finally checked me out to go home (there were no hospital beds available in Calgary that night) he told me in broken English how he thought I was lucky to be alive.

Next month I will go back to that clinic. I will line up and wait two to four hours to get a flu shot; a vaccination that could save my life in a nation with Third World health care.

Canada offers many great things. But someday I will return to my home, the United States. I just hope it is the United States I left and not just another country that has sold out to the siren call of socialism and the mediocrity it brings.

The True Cost of Obamacare
I have no doubt from my own experiences that health care in the United States is better than in Canada. But of course the Obama administration’s single-minded approach to instituting universal health care is about money.

Last June in an ABC special Obama proclaimed, “The status quo is untenable… It is bankrupting families, bankrupting businesses and bankrupting our government at the state and federal level. So we know things are going to have to change.”

What Obama is really saying is that if the government runs things the quality of health care will be just as good as before and the cost of it will be a lot lower. But when was the last time you saw the federal government do a good job of managing anything? Consider that Washington has grown the national debt from $5 trillion in 1995 to almost $12 trillion this year while damn near reprising the Great Depression.

Health policy experts say guaranteeing coverage for all Americans may cost $1.5 trillion over the next 10 years. That is more than double the $634 billion “down payment” the Democrats are trying to sell.

Meanwhile, America will be adding another huge bureaucracy, about the last thing the world’s largest indebted nation needs. If you don’t believe me consider what has happened in Britian.

According to the Aug. 13, 2009 Examiner.Com, “England’s health care program is the third largest employer in the world and their citizens are getting anything but health care.”

To read the entire story click here.

Debt, the Dollar and Your Financial Health
The United States is increasing its national debt at a dizzying pace. Socialized medicine will only accelerate this trend. That is exactly what happened to Canada when universal health care was introduced in 1968. Over the next decade Canada’s national debt soared. In time it had Canadian dollar investors rushing for the exits.

In 1968 the Canadian dollar stood at par with its U.S. counterpart. Fifteen years later the Canadian dollar had lost nearly a third of its value. This period coincided precisely with Pierre Trudeau, Canada’s Prime Minister (1968-1984), whose Liberal government shamelessly socialized Canada.

Yet many Canadians survived and even prospered during the Trudeau years by diversifying out of the Canadian dollar and buying physical gold. From 1971 to 1980 the price of gold in Canadian dollars rose C$35 per ounce to over C$1,000 per ounce!

Action to take: Watching the Obama administration is frighteningly reminiscent of the Trudeau years. And while I can only pray that America doesn’t revert to socialized medicine I can offer sound advice when it comes to your money. Given the current political and economic conditions I urge you to put at least 10 percent of your investible assets in physical gold. I recommend 1-ounce South African Krugerrands, Canadian Maple Leafs or American Eagles. Call your local coin dealer or if you need one, we recommend Asset Strategies International in Rockville, Md., 800-831-0007 or 301-881-8600 or go to www.assetstrategies.com.

Yours for real wealth and good health,

John Myers

Myers’ Energy and Gold Report

Money, Oil and Power

"The Capitalists will sell us the rope with which we will hang them." Vladimir Ilyich Lenin.

China is building itself the world’s largest war chest. Not in tanks, planes or even secret submarines. It has accumulated the largest collection of IOUs in history.

In an age where real politik is of greater import than Otto von Bismarck could ever have imagined, China is positioned to use the once almighty buck against the very nation that gave birth to it—the United States of America.

The U.S. has unprecedented debt and its largest creditor is China. But Beijing has aims on much bigger things than accruing depreciating dollars. Number one among its objectives is access to Middle East oil.

China Zeros in on Middle East

With real gross domestic product growing at a rate of 10 percent per year, China’s need for energy will surge by 150 percent by 2020. To sustain its growth China requires increasing amounts of oil. Its oil consumption grows by almost 8 percent a year, seven times faster than America’s! At the end of the next decade China will consume more oil than the United States.

There is only one place on earth that can meet China’s and America’s demand for oil and that is the Middle East. The region holds two-thirds of the world’s conventional oil reserves, and China is thirsting to control the world’s last remaining rich oil reservoirs.

Some 60 percent of China’s oil imports come from the shifting sands of Arab lands. By 2015 the share of Middle East oil sustaining China will reach 70 percent.

With Mexico’s elephant fields rapidly declining and Canada unable to make up the difference, the United States must also focus its attention on securing Arab oil.

“Where is the oil (of tomorrow) going to come from?” asked future Vice President Dick Cheney in 1999. “The Middle East, with two-thirds of the world’s oil and the lowest cost, is still where the prize ultimately lies."

If Cheney understood the importance of the Middle East a decade ago, we can be certain that Beijing understands it today.

There is no question that China and the U.S. are planning a future powered by Middle East oil. The real question is whether this last bastion of crude can meet the demands of both countries.

“Tensions over oil resources reflect the larger distrust between the sole superpower and the rapidly rising China.” wrote MSNBC a couple of years ago.

History Lesson about Ike and Real Power

If push comes to shove, China may hold the trump card. The reason is its unprecedented leverage over the United States.

The U.S. Treasury is auctioning off $200 billion—yes BILLION—in new debt every week.

“China has an estimated two-thirds of its more than $2 trillion in reserves in dollar assets, including more than $800 billion in Treasuries,” wrote The Wall Street Journal on July 29th.

In less than two years China will have its hands on $1 trillion in liquid U.S. IOUs.

That one country would leverage the debt it held of another for political and economic gain is not unprecedented. In the summer of 1956, England and France hatched a secret plot to re-capture the Suez Canal with force if Egyptian President Nasser nationalized the waterway.

After World War II the ruling elite in London saw the Suez Canal as the Anglo-Saxon expressway to its remaining colonies in North Africa and India. The canal was also taking on new importance.

“In 1948, the Suez Canal was gaining a new role—as the highway not of empire, but of oil…. By 1955, petroleum accounted for half of the canal’s traffic, and, in turn, two thirds of Europe’s oil passed through it,” wrote Daniel Yergin in his bestseller: The Prize: The Epic Quest for Oil, Money, and Power.

That meant the Suez Canal was a potential chokepoint and the most valuable waterway in the world. Not a property to be trusted to Arab hands thought some members in the House of Lords. Key among them: British Prime Minister Anthony Eden.

So when Egypt nationalized the Suez Canal, France and England were putting together a response. In October 1956, British and French forces attacked Egypt. Soon after, British paratroopers hoisted the Union Jack over the Suez Canal.

Eden knew that the U.S. opposed the operation. But he also knew that President Eisenhower would never send American forces into combat against its two closest NATO allies.

The Sun Sets on the British Empire

It turned out Ike didn’t have to. The Eisenhower administration forced a cease-fire on Britain and France without firing a shot. It did it with money.

At the time the U.S. was the world’s largest creditor and one of its biggest borrowers was Great Britain. The U.S. had sustained England through the war and was using the Marshal Plan to help rebuild the nation.

Ike told Secretary of the Treasury George Humphrey to prepare to liquidate U.S. government holdings of British bonds. London was made aware of Ike’s plan.

The Chancellor of the Exchequer Harold Macmillan told Eden that he believed Eisenhower would sell England down the river if British troops did not withdraw immediately. He had an even more pressing message from Macmillan—if London resisted and the Treasury sold its Sterling bonds—England would be bankrupt within a month! The island nation would face a winter without food or oil.

The next day Eden announced a cease fire and evacuated England’s troops from Egypt. He did it without even consulting the French.

For centuries England had been indomitable. Yet, with a phone call, Ike had done what the Spanish Armada, Napoleon’s army and Hitler’s Luftwaffe had all failed to do. He had brought the British Empire to its knees.

England was humiliated. Britain would never again been seen as a world power and its currency, the Pound Sterling, began a freefall which lasted for decades.

As the above chart shows, in 1956 it took almost $3 to buy a British pound. But a long decline in the value of the pound that had started in World War II began in earnest. By the 1970s London no longer had the financial wherewithal to peg the pound to the dollar. By 1985 the pound was trading at par with the buck!

Bond Market Peril

Britain’s and the pound’s decline occurred as America rose to super-power status. Today America finds itself where England was half a century ago—defending its interests, but facing an economic giant in China, a country that does not have the military to dominant but does have the money to dictate their vision.

Last spring the U.S. Treasury market was close to panic when China hinted it might want to diversify out of U.S. government debt. And as an investor you should understand that China doesn’t even have to sell its huge holdings of U.S. Treasuries for the bond market to go into a tailspin.

All it simply has to do is sit out a few Treasury auctions. If that were to happen, market forces would drive up U.S. interest rates. All of which makes today’s political and economic environments very risky for bond holders and potentially lucrative for real asset investors.

Middle East Mayhem Could Push Oil Over $150 per Barrel

The philosopher Jean-Jacques Rousseau once said, “The more things change, the more they stay the same.”

I’ve been thinking about what Rousseau said because I have passed an anniversary of sorts. Thirty-years ago this past spring I was trying desperately to keep my grades up as a junior at the University of Calgary.

One afternoon the sun was beating into our classroom. It was a petroleum-economics class taught by a Frenchman, Dr. Mitra. But that day was unusual because the professor was agitated. This was most strange. The only agitation I had ever seen in that class came from the students who regularly received Cs and Ds from the white smocked, pipe carrying Dr. Mitra.

As the bell rang, Mitra exclaimed: “This thing in Iran… this Khomeini; it changes everything!”

I don’t remember what I thought of this. I was young and selfish, so I probably wondered if it would affect the final I was already cramming for. It turned out that Dr. Mitra was talking about a lot more than a final exam for one of his classes.

It was the late 1970s, the stock market was in crisis, there was a young inexperienced Democrat sitting in the Oval Office and, oh yes, a pop star that some called “The King”, had died prematurely—of a drug overdose in his home, they said.

Sound familiar?

Back to the Future
Years later I think Dr. Mitra was saying the revolution in Iran would permanently change the markets. That nothing in international oil would be as it was before; that the removal of the Shah and a new clerical regime with its Supreme Leader would transform the Middle East.

He was right.

In 1979 the Iranian Revolution sent oil prices soaring. The country’s oil production plummeted drastically to 2.5 million barrels a day. The 1980 Iraqi invasion worsened the situation. In fact, combined production of both countries fell to just 1 million barrels per day compared to 6.5 million barrels in 1978! This lowered the global production by 10 percent, and oil prices rocketed to $36 per barrel.

Today Iran is on the brink of another revolt. America is getting ready to pull out of Iraq, a move that could throw that country into chaos. With violence escalating in both nations—countries that produce 12 million barrels of oil per day, an amount almost equal to what America imports—the ordinances are set for another price explosion.

In fact, there is a growing potential for a new terror to boil-over in the Middle East… a nuclear kind of terror.

Just how close Iran is to having operational nuclear weapons is unclear. But one thing is certain; Israel is taking the threat seriously. Last month former Israeli defence minister Shaul Mofaz told Israeli radio that Iran is a ballistic power close to becoming a nuclear power.

“Iran has undoubtedly passed beyond the point of no return, moving closer to the ultimate nuclear capacity everyday," said Mofaz.

We are talking nuclear missiles in a region that holds two-thirds of the world’s conventional petroleum reserves. It’s enough to give American strategic planners nightmares. It also sets up the biggest potential for oil and gas profits ever. A scenario that I believe will push crude oil past $150 per barrel and natural gas above $8 per 1,000 cubic feet.

Then, on July 10th, Israel issued a direct warning to Iran. It spelled out the catastrophic consequences if it attacks the Jewish state with weapons of mass destruction.

In an interview published last Friday in the Hebrew daily Ha’aretz, Israel’s national security advisor Uzi Arad said Israel must have "tremendously powerful" weapons to deter or retaliate for a nuclear strike.

In other words, touch us and we will wipe you off the map.

To read more of Israel’s sword-first diplomacy, go to: http://www.voanews.com/english/2009-07-10-voa10.cfm.

In 2009 Iran’s Crisis is an Even Bigger Threat

My office sits 20 minutes from Calgary’s core and I try to get downtown as often as I can. Last week I was at the Canadian Unconventional Oil Forum held at one of the city’s fancier hotels. It’s not so much what you hear from the speakers as what you hear at the bar—coffee, juice or otherwise.

I ran into an old university buddy during a break. He heads up a mid-sized oil and gas company that has more than 100 million barrels of proven reserves.

“If there’s trouble with Iran, it’s going to be a real mess,” he said. “Look at Bush and that Iraqi thing. That was about oil. And if this thing in Iran gets out of hand, the U.S. will be in there too. They’ve got no choice.”

I asked him if I could quote him.

“Sure,” he said as he walked back towards the lecture theatre, “just don’t use my name.”

Annual U.S. Field Production of Crude Oil

The fact is America’s fortunes are tied to Iran and the Middle East. Consider this:

  • The United States accounts for less than 4 percent of the world’s oil production but consumes more than 30 percent of world oil supplies.
  • The average oil well in the continental United States pumps less than 300 barrels per day. The average well in Iran produces 10,000 barrels per day.
  • The last elephant oil field (more than a billion barrels) discovered in the United States was in Prudhoe Bay, Alaska in 1968.

In fact, 2009 marks a milestone for the United States. For the first time since World War II, we pumped less than 5 million barrels of oil per day. We pumped almost twice as much oil 30 years ago during the first Iranian crisis.

As Thomas Wolfe said, we can’t go home again

Meanwhile, Iran remains an oil kingpin. It is the de facto leader of OPEC, has the second largest conventional oil reserves in the world and is the world’s fourth largest producer of crude.

Yet in the end maybe Rousseau was wrong, at least in this instance. Things haven’t so much stayed the same, they have gotten worse. And that is bad news for America which lately has only shown talent for one thing—pumping money.

It is however good news for petroleum investors. The first Iranian revolution doubled the price of crude oil. Today, with America so much more dependent on the Middle East and with the stakes so high, the upcoming price spike could be huge, perhaps putting oil above $150 per barrel. Any way you look at it, that’s an A+ for energy investors.

Yours for real wealth,

—John Myers